GST penalty of 18% on employees exiting a company without serving the notice period

Here is an important bit of news for all those who are looking to quit a company and plan to leave without serving the notice period.

A recent decision by the Gujrat Authority of Advance Rulings has ruled a case on the recovery of notice period from employees looking to skip serving notice period by the imposition of 18 percent GST.

This ruling has come in act due to a case relating to an Ahmedabad – based export company, Amneal Pharmaceuticals, that sought advance ruling on employees’ issue – exit from their job without serving the mandatory three – month notice period.

Yes, this might come as a big shocker and a caution for all those who may be on the verge of resigning from a particular company, looking to join the new company as soon as possible.

However, because of the above ruling, if one is to exit the current company without serving the notice period as mentioned in the offer letter, terms and agreements, you may have to pay 18 percent goods and services tax (GST) on the recovery of the pay. A similar 5 percent GST is also applicable to Food sold in canteens.

Notice period refers to the time – period between when an employee may submit an official resignation to his immediate superiors and subsequently the firm’s HR till the time of the last working day.

As a standard practice in most companies, the notice period is meant for several reasons – handing over important assignments, if the leaving employee is involved in any key assignment or projects, handing over clients, and other important details to another employee who might be taking his place.
As a standard HR practice, any employee is asked to serve the mandatory notice period as pre-mentioned in the contract details or the offer letter.

Industry experts view

Industry experts have said that pertaining to the above – while this shows that notice pay is ‘not GST exempt,’ the payment of this tax could differ based on the terms of employment and interpretations by the tax authorities.

Further on which transaction is goods and services tax is applicable cannot be certified in the GST law since they are numerous transactions all over the country. Albeit the GST law provides general guidance on the same.

Moreover, the law is interpreted in a specific situation by the Advance Ruling authorities, pointing out that in this case as mentioned above ( Amneal Pharmaceuticals), the Advance Ruling authorities have interpreted to say that since the serving notice period was a service, the notice pay of the employee should be attracting GST.

Also added was that the above was a ruling in a specific case and may not apply for all incidents where a corporate employee misses out on serving the notice period.

In many instances, as soon as the employee puts in the resignation, he may be excused by the employer for serving the notice period and hence not pay the salaries at all if so decided by the corporate and the exiting employee and immediately released from the position.

The above has been seen to happen often.

Hence, even while GST is applicable, depending on the contract of employment and terms pertaining to the notice period, individual companies can take individual decisions related to the notice period to be served by an employee.

What can be done?

According to those working in HR or working as HR consultants who work with companies on developing employment contracts – it is best for both the employees and the employers to sit across and discuss all matters related to GST.

If in case GST is applicable, then the employee must be told in advance of the consequences of leaving without serving the notice period as mentioned in the employment contract. In the end, if it turns out that the employer is bearing 18 percent GST, then the same is liable to be recovered from the employee.

Hence, the employees should be absolutely sure about the payment terms and conditions and sign on the dotted line of the offer letter only after careful consideration and verification.
This will help avoid any payment penalties on GST’s account later if the employee should choose to exit from a particular corporate.

What about Food served in Office Canteens?

The GST debate has also come to include whether it applies to corporate services as canteen food served to office employees.

In yet another decision, GAAR decided that the employer is liable to pay GST on Food provided in canteens and served to its staff, for which the latter pays a charge.

Hence, the GST on canteen foods is set at 5 percent, which means that the employer’s tax payable to the GST authorities will be recovered from the staff in the form of higher prices.

According to the prevailing laws and according to Section 46 of the Factories Act, 1948, any factory that employs more than 250 workers are liable to provide a canteen facility to its employees.

Reading the fine lines and prior discussion

Hence, with the above ruling, it would be prudent for an employee to join a corporate/firm to read the offer document clearly and understand the terms mentioned in the offer letter.

It would also mean that many of the perks that major corporates, especially in the IT sector as has been seen, may indeed come at a cost coming out of the employee pocket.

Having a discussion and clarity on the terms related to GST – notice period and canteen services – will play well for the employee if he/she chooses to exit the company at any given time.

Read the terms and conditions carefully and, if needed, seek clarity on the same before agreeing to the offer letter. Similarly, while exiting has a clear understanding from the employer regarding the approved manner of exiting – to avoid any complications.